The index giant will add 222 China A Large Cap stocks — including Bank of China and Tsingtao Brewery — on a gradual basis beginning next year. The review is the fourth straight year MSCI has considered adding the mainland-traded stocks, known as A-shares in China.

Corporate governance is a particular bugbear as many of the 222 companies are large state-owned enterprises, said Kevin Carter, CEO of Big Tree Capital and founder of the Emerging Markets Internet and Ecommerce ETF.

"You have all of these enormous state-owned banks, the four big policy banks, the oil companies, and these are really not run like traditional Western companies," Carter said.

"These companies are filed with inefficiencies, they are filled with conflicts of interest and they are frequently filled with fraud. Adding more of that, even though it's just a small amount, I don't think it helps helps investors," he said, adding that it was not a problem unique to China but also to markets dominated by such mega companies, like Brazil.

MSCI had previously left the A-shares out of the EM (emerging markets) index but it relaxed its investment criteria in March in a bid to address concerns on capital repatriation and suspended stocks.

Michael Every, head of Asia Pacific Financial Market Research at Rabobank said "there are so many things to be negative about rather than positive" about the MSCI decision.

"It's a pattern we've seen in recent years of China managing to shoehorn itself into various different benchmark indicators like becoming an IMF reserve currency in 2015, but (that) has actually proved to be meaningless in reality because China doesn't meet the ... meat of what needs to be addressed in that particular area," Every told CNBC's "Street Signs."

The only upside for investors is that Chinese stocks look relatively cheaper compared to their peers globally.